Brant
v.
Comm'r of Internal Revenue

Tax Court of the United States.Nov 9, 1949
13 T.C. 712 (U.S.T.C. 1949)
13 T.C. 712T.C.

Docket Nos. 12877 12879 12880 12881.

1949-11-9

THOMAS J. BRANT, PETITIONER, ET AL.,1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

John T. Riley, Esq., and Richard K. Yeamans, Esq., for the petitioners. Robert H. Kinderman, Esq., for the respondent.


In 1932 petitioners and others, acting under authority of the trust indenture, withdrew property from a trust of which they were beneficiaries, placed a mortgage thereon to secure their liability as guarantors, and returned the property to the trust, subject to the mortgage. In 1938 the beneficiaries directed the trustee to convey part of the mortgaged property to the mortgagee in discharge of their guaranty and in lieu of foreclosure. Thereafter, at the election of the beneficiaries, the trust was closed and the remaining assets distributed. In 1943 petitioners, pursuant to the terms of the mortgage, received from the holders of the guaranty a share of an amount recovered on the debt they had guaranteed. Held, the amount recovered was received by petitioners in their own right and not as distributees of the trust, and the value in 1938 of the property conveyed in discharge of their obligation was the basis for determining gain or loss. This value being in excess of the amount recovered in 1943, the recovery was a return of capital and not taxable income. John T. Riley, Esq., and Richard K. Yeamans, Esq., for the petitioners. Robert H. Kinderman, Esq., for the respondent.

Respondent determined deficiencies in income and victory taxes for 1943 against petitioners as follows:

+-------------------------------+ ¦Thomas J. Brant ¦$20,647.00¦ +--------------------+----------¦ ¦Robert A. Brant ¦19,896.23 ¦ +--------------------+----------¦ ¦David O. Brant ¦15,751.40 ¦ +--------------------+----------¦ ¦Elizabeth Brant King¦15,783.62 ¦ +-------------------------------+

The sole issue is whether the amount of $27,941.49 received by each petitioner in 1943 constituted ordinary income to such petitioner. The stipulated facts are found as stipulated and are here summarized. Other facts are found from the evidence presented at the hearing.

Petitioner David O. Brant claims an overpayment of $39.91 and petitioner Elizabeth Brant King claims an overpayment of $36.85.

FINDINGS OF FACT.

Petitioners are individuals, brothers and sister, children of Otto F. Brant, who died in 1922. They reside in or near Los Angeles, California. Each petitioner filed income tax returns for 1942 and 1943 with the collector of internal revenue at Los Angeles.

Otto F. Brant owned an interest in the California-Mexico Land & Cattle Co., a corporation, which owned interests in the Colorado River Land Co., S.A., a Mexican corporation, hereinafter referred to as the land company, and Lower Colorado River Ginning Co., S.A., a Mexican corporation, hereinafter referred to as the ginning company. These Mexican corporations owned agricultural lands in Mexico. Otto F. Brant was an officer and stockholder of the Title Insurance & Trust Co., a California corporation, and substantially all his property, including the interest in the California-Mexico Land & Cattle Co., was placed in a trust with that trust company. After the death of Otto F. Brant this trust was closed and the corpus passed to his six children, including the four petitioners, in equal shares. These six heirs, on March 24, 1926, placed the inherited properties, including their interests in the California-Mexico Land & Cattle Co., with the Title Insurance & Trust Co., as trustee, in a certain trust known as Trust No. P-7021, in which they were named beneficiaries, each having a one-sixth interest.

The trust indenture empowered the trustee to administer the trust property. It provided, inter alia, that should the trustee desire the advice of the beneficiaries as to the administration of the trust or should the beneficiaries desire to advise or request the trustee relative to any act to be performed by it, the trustee should have the right and power to rely and act upon the written advice of a majority of the ‘Advisory Committee‘ of the trust, without liability for so doing. The beneficiaries were named as members of the advisory committee.

The advisory committee remained the same during the existence of Trust No. P-7021, except for the death of Helen Brant Bayly on September 3, 1938. The advisory committee took an active part in the management of the trust, holding frequent meetings and instructing the trustee as to any action the beneficiaries desired to have taken.

Some of the other persons interested in the land company and the ginning company were M. H. Sherman, Harry Chandler, William H. Allen, Jr., and Frank X. Pfaffinger. The Brants' interest was a one-fifth share.

In June 1925 Robert A. Brant, Sherman, Chandler, Allen, and Pfaffinger executed a guaranty in favor of the Citizens National Bank of Los Angeles covering the obligations of H. H. Clark and/or the ginning company to the extent of $1,000,000. In October 1926, a new guaranty to such bank was executed in the amount of $3,000,000, signed by David O. Brant, Sherman, Chandler, Allen, and Pfaffinger. Thereafter that bank loaned money to the ginning company. In March 1930 and thereafter, D. O. Brant, Sherman, Chandler, Allen, and Pfaffinger executed various guaranties or endorsed notes to secure loans from certain other California banks to the ginning company or the land company. the land company also guaranteed the notes of the ginning company.

The Chandis Securities Co., a corporation, succeeded to the rights and liabilities of Harry Chandler in connection with the California-Mexico Land & Cattle Co., the ginning company, and the land company. The M. H. Sherman Co., a corporation, succeeded to the rights and liabilities of M. H. Sherman in connection with such corporations.

In executing guaranties and endorsements, David O. Brant and Robert A. Brant were acting on behalf of the six sons and daughters of Otto F. Brant.

In September 1932 the banks advised the M. H. Sherman Co. and the Chandis Securities Co. that they would no longer be able to continue the loans and requested the guarantors to make good their guaranties. The M. H. Sherman Co. and the Chandis Securities Co. thereupon paid the banks the full amounts of both principal and interest then due and the notes and guaranty contracts were transferred to them. The total amount of principal so paid was $2,356,615 and interest was paid to and including September 2, 1932, in the amount of $38,930.34. The M. H. Sherman Co. and the Chandis Securities Co. thereupon made demand upon Robert A. Brant, David O. Brant, Allen, and Pfaffinger for pro rata payment of the total amount paid on account of such notes or for security covering the amount of their respective liabilities. David O. Brant thereupon negotiated with the Chandler and Sherman interests, which agreed to accept as security for payment a mortgage on certain property known as the Brant Rancho. The other members of the Brant family agreed to this action.

The Brant Rancho was a farm of some 850 acres located on Ventura Boulevard within the corporate limits of Los Angeles. The property was then used and occupied by some members of the Brant family as a dairy farm and show place for horses. The title to the rancho was held by the Title Insurance & Trust Co. under Trust No. R-9052, for the benefit of the trust company as trustee under Trust No. P-7021.

In November 1932, pursuant to instruction from the advisory committee of Trust P-7021, the trustee transferred the Brant Rancho to David O. Brant for the purpose of enabling him to place a mortgage thereon to secure the debt described above. The transfer was made by quitclaim deed dated November 10, 1932. David O. Brant executed and delivered a mortgage dated November 11, 1932, to the Chandis Securities Co. and the M. H. Sherman Co. covering the Brant Rancho. By quitclaim deed dated November 11, 1932, David O. Brant transferred the property to the trustee, subject to the mortgage. The mortgage, which was also executed by the mortgagees to show their acceptance of its terms, described the circumstances giving rise to the indebtedness, stated that the mortgagees owned and controlled promissory notes aggregating $2,496,615; that the mortgagor became liable to the payees for the full amount, but, as between the coguarantors, was liable to the extent of one-fifth of the indebtedness; and that the mortgagees and their associates might desire to make further advances. It stated that the mortgagees canceled the mortgagor's endorsements and guaranties and extinguished his liability and that the mortgagees accepted the mortgage by way of novation, they to have recourse against the property covered as a means of reimbursement of a portion of their advancements already made and certain future advancements. The mortgage also provided that in certain circumstances, including ‘The loss of the Mexican properties, or the rendering of the same unavailable for the operation thereof by the present owners on account of war, revolution or expropriation, or any other disaster or cause,‘ the mortgagees should have recourse against the mortgaged property. It further provided that:

The Mortgagees further agree that in the event foreclosure is had on account of the loss or abandonment of the properties, and if at any time thereafter the Mortgagees should receive from any person, corporation or government, (other than the co-guarantors) any payment upon the indebtedness of the Mexican corporations to the Mortgagees, one-fifth (1/5) thereof shall be paid over to the Mortgagor.

Every covenant, stipulation, promise and agreement herein shall bind and inure to the benefit of the mortgagor and the mortgagees, and their respective successors in interest.

In 1936 the Chandler-Sherman Corporation succeeded to the interests of the M. H. Sherman Co. and the Chandis Securities Corporation.

Early in the year 1938 the Government of Mexico expropriated 287,000 acres of land belonging to the land company, which included most of the land then under cultivation.

In 1938 Chandler-Sherman Corporation instituted an action in the Superior Court of the State of California in and for the County of Los Angeles against the Colorado River Land Co., S.A., based upon the indebtedness evidenced by the notes of the defendant and by notes of the ginning company guaranteed by the land company. On March 11, 1938, judgment was rendered in the action in favor of the Chandler-Sherman Corporation in the sum of $3,915,488.48, including principal and interest. The principal amount of the judgment was $2,780,911.97, with interest to the date of judgment in the amount of $1,134,576.51.

In April and May 1938 the advisory committee of Trust P-7021 instructed the trustee to convey by grant deed to the Chandler-Sherman Corporation a portion of the Brant Rancho then held in the trust, directing the trustee that ‘you are to collect no consideration for this conveyance, as the same will be consummated outside of the trust.‘ Pursuant to such instructions the northern part of the rancho was transferred by the trustee, retaining in the trust some 100 acres, including the principal buildings, in the southern part of the rancho. The portion of the rancho conveyed to the Chandler-Sherman Corporation had a fair market value on the date of conveyance in excess of $167,648.92. The conveyance was in full satisfaction of the Brants' personal liability as guarantors.

The basis of each petitioner's beneficial interest in Trust P-7021 for Federal tax purposes in November 1932, on May 7, 1938, and in December 1938 was not less than $300,000.

Trust P-7021 filed fiduciary or partnership Federal income tax returns for the years 1926 to 1934, both inclusive. This trust was treated as an association taxable as a corporation for Federal income tax purposes for the years 1935 to 1938, both inclusive, and it filed corporation returns for those years.

The beneficiaries of Trust P-7021 elected on November 3, 1938, to wind up and dissolve pursuant to the provisions of section 112(a)(7) of the Revenue Act of 1938 and such dissolution was completed on December 29, 1938, the trust being terminated under the provisions of the trust agreement, and all remaining assets in the trust were thereupon delivered to the beneficiaries.

Helen Brant Bayly, one of the Brant heirs, died on September 3, 1938. Alfred T. Brant, another of the Brant heirs, died on March 31, 1942. No value was included in, or claimed by, the estate of either decedent on account of the interest in the judgment held by the Chandler-Sherman Corporation against the land company or on account of any subrogation rights of either decedent on account of the discharge of their liabilities as endorsers or guarantors.

A convention was effected between the Government of the United States and the Mexican Government whereby the latter paid amounts into the Treasury of the United States to meet certain claims of nationals of the United States. Early in 1939 the American stockholders of the land company presented to the Agrarian Claims Commission, United States and Mexico, claims for losses by virtue of the expropriation of lands by the Government of Mexico. The Claims Commission made awards which were accepted by the American stockholders and certified to the Treasury Department. The American stockholders assigned the proceeds of the awards to the Chandler-Sherman Corporation for the purpose of paying the judgment held by that corporation against the land company. The awards to the stockholders of the land company were in the amounts of $2,941,209.08 as principal and $815,413.15 as interest. In November 1943, $838,244.60 was paid by the Treasury Department on account of these awards, of which $167,648.92 was the share of the Brants, and on December 15, 1943, the sum of $100,589.35 was paid by the Chandler-Sherman Corporation to David O. Brant. The Chandler-Sherman Corporation, with the consent of the Brants, retained the further sum of $67,059.57 from money which would otherwise have been paid by it to David O. Brant. The sum of $167,648.92 was due David O. Brant in a fiduciary capacity and the amount received by him was disposed of one-sixth to each of the other Brant heirs and one-sixth was retained for himself. The Federal income tax returns filed by the beneficiaries of the estate of Helen Brant Bayly, deceased, and by the estate of Alfred T. Brant, deceased, for the year 1943 included as ordinary income the money paid to the beneficiaries and the estate on account of the judgment. The respective bases of the judgment and the subrogation rights as reported in the returns were zero.

The corporation income and excess profits tax return for the calendar year 1938 of the Title Insurance & Trust Co., trustee under its ‘Private Trust P-7021-Brant,‘ filed on March 15, 1939, shows total income of $92,478.49, and deductions of $406,698.36. The deductions include bad debts amounting to $281,935.43, of which $280,381.72 was reported as the ‘Net Bad Debt Written off because lands of Colorado River Land Co., expropriated by Government of Mexico. ‘ The return reported a net loss of $314,221.87. The schedule of capital gains and losses included a loss of $479,069.84 for shares of stock in the California-Mexico Land & Cattle Co. written off on account of the expropriation, and a gain of $80,339.49 from transfer of part of the Brant Rancho ‘in connection with settlement of certain liabilities under mortgage in the form of an agreement executed by David O. Brant, accommodation maker, and dated 11-11-32.‘ The return contained a schedule showing ‘Distribution of Assets and Liabilities to Beneficiaries.‘ This schedule shows a one-sixth beneficial interest distributed to each of the petitioners herein, each one-sixth distributive share being shown in the amount of $164,521.60.

The trustee prepared a schedule of assets distributed to the beneficiaries of Trust P-7021 showing its allocation of cost base of the beneficial interest to the assets distributed as of December 28, 1938. Therein the cost of the beneficial interest in the entire trust was given as $1,913,799.59. Cash of $15,610.13 was shown as distributed. The amount of $381,419.44 was allocated to loans, stocks, and bonds on the basis of appraised or market values, and $1,516,770.02 was allocated to real estate in proportion to the assessed values thereof. The Brant Rancho was allotted a cost basis of $252,677.04. The judgment against the Colorado River Land Co. and the right of subrogation incident to the mortgage given in 1932 on the Brant Rancho were not listed in this schedule.

Attached to the 1938 income tax return of each of the petitioners was an executed Form No. 964 of the Treasury Department entitled, ‘Election of Shareholders under Section 112(b)(7) of the Revenue Act of 1938,‘ and an executed Form No. 1099 L of the Treasury Department entitled, ‘Information Return Distributions in Liquidation for Calendar Year 1938,‘ filed by the Title Insurance & Trust Co. as trustee, showing in that portion of the return entitled, ‘Fair Market Value at date of Distribution‘ the following instead of a dollar figure: ‘cost price to distributee is cost of beneficial interest.‘

The 1943 income tax return of Elizabeth Brant King shows the following:

+-----------------------------------------------------------------------------+ ¦Date ¦Date ¦Kind of property ¦Gross sales ¦Cost or other ¦ ¦acquired ¦sold ¦ ¦price ¦basis ¦ +---------+------+--------------------------------+------------+--------------¦ ¦12-38 ¦1943 ¦Judgment against Colorado River ¦$16,764.89 ¦$16,764.89 ¦ ¦ ¦ ¦Land Company ¦ ¦ ¦ +-----------------------------------------------------------------------------+

This amount collected during 1943 on interest in Judgment against Colorado River Land Company received in liquidation of Trust 7021, Title Insurance and Trust Company, trustee, during December, 1938, pursuant to Section 112(b)(7) Rev. Act of 1938. Cost of beneficial interest in trust allocated to assets received. Cost allocated exceeds amount received on Judgment.

Substantially the same information appears in the corresponding sections of the returns of the other petitioners for the year 1943.

OPINION.

ARNOLD, Judge:

In 1943 each petitioner received $27,941.49. Their contention is that, in order to meet their liability as guarantors of certain obligations, they withdrew specific property from a trust of which they were beneficiaries with a right to direct the use of the trust assets, mortgaged the property to their coguarantors, and later caused it to be transferred to the mortgagee, stipulating for a right to share in any recovery that might be effected, and that in 1943 they received, pursuant to this stipulation, a partial recovery amounting to less than the value of the property transferred, which recovery constitutes a return of capital.

Respondent contends that the property involved was an asset of the trust, the right of recovery contracted for became the property of the trust, and this right passed to the petitioners upon liquidation of the trust in 1938; that the right was, in fact, worthless at that time and no part of the basis of the trust assets was, or could be, allotted to it in the distribution; and that its basis to the petitioners was zero, and, hence, the entire amount recovered in 1943 by virtue of the right is taxable income.

Consideration of the legal effects of the series of transactions here involved leads us to the conclusion that the petitioners' interpretation is correct.

The petitioners inherited from their father certain property which, in 1926, they placed in a trust identified as Trust No. P-7021. Among the assets was an interest in the California-Mexico Land & Cattle Co., which owned interests in two Mexican corporations, which in turn owned agricultural lands in Mexico. At the request of Chandler, one of the individuals interested in the Mexican lands, David O. Brant was designated in 1925 by his brothers and sisters to act for them in matters relating to those lands. He testified that he had various meetings with Chandler and visited the Mexican lands many times; that to finance crops on those lands the Mexican corporations borrowed money from the California banks, which required the interested individuals to guarantee the loans; that in endorsing and guaranteeing the notes of these corporations he acted for, and with the consent of, his brothers and sisters, as well as on his own account; and that each of the six had an equal share in the venture. It is clear that in giving these endorsements and guaranties, David O. Brant was acting for the six. They accepted the liability, as is shown by their acts in authorizing the mortgaging and transfer of the Brant Rancho, and when David received funds upon the recovery in 1943 he divided them equally among the brothers and sisters and estates of those deceased. He was not acting, and collectively they were not acting, for the trust. The Brants had substantially all their property in the trust and if they were called upon to meet this or any other large liability, recourse to trust assets would be necessary. The trustee, however, was not bound by the guaranties or endorsements and the debt which arose as a consequence thereof was not the debt of the trust. David did not represent himself as agent of the trust in signing the guaranties or endorsing the notes. There is no evidence that he was authorized so to act. The first guaranty was given prior to the creation of Trust P-7021. It is clear, therefore, that the liabilities created by the endorsements and guaranties were those of the six individuals and not of the trust or the trustee. Respondent does not contend otherwise.

In 1932 the banks demanded payment of the loans. The Chandis Securities Co. and the M. H. Sherman Co., holding interests of some of the guarantors, paid the banks, took over the notes and guaranty contracts, and called upon the other guarantors to pay their pro rata shares. David negotiated with the representatives of these companies and they agreed to accept a mortgage on the Brant Rancho in satisfaction of the liability of the Brants. He discussed the matter with the other members of the family who agreed to this. The Brants then instructed the trustee to convey this land to David O. Brant, without consideration, in order to permit him to place a mortgage on it and the trustee complied. David executed a mortgage to the Chandis Securities Co. and the M. H. Sherman Co. The mortgage was also executed by the mortgagees and contains the terms and conditions of the agreement between the parties. It described the circumstances giving rise to the debt and stipulated that David's endorsements and guaranties were canceled and the mortgagees accepted the mortgage by way of novation. The mortgage was also to cover future advances by the mortgagees, under stated conditions, for maintenance of the Mexican lands. It provided that in certain contingencies, including expropriation of the Mexican lands, the mortgagees should have recourse against the mortgaged property and that if foreclosure was had and the mortgagees later effected a recovery on the indebtedness of the Mexican corporations, one-fifth should be paid to the mortgagor. At that time the persons interested in the Mexican lands were hopeful that future operations in Mexico would be profitable and enable them to recover the amounts advanced. If this occurred the Rancho would not be lost to the Brants.

The Brants thus secured their individual and private obligation by placing an encumbrance on what had been a trust asset. They had power to use this trust property for their private purpose, for, under the terms of the trust instrument, they could direct the trustee relative to the administration of the trust. It is shown that the trustee invariably followed the directions of the advisory committee, which were given in the form of letters signed by at least four of the six. They dealt with the trust property as their own.

In securing this debt of the Brants, David stipulated for a right to share pro rata in any recovery following a foreclosure. He held this right as representative of the six. After the mortgage agreement was executed, David, by quitclaim deed, transferred the Brant Rancho back to the trustee, subject to the mortgage. Although the mortgage itself provided that every stipulation should inure to the benefit of the parties and their respective successors in interest, the trustee or trust was not the successor in interest of David O. Brant, in so far as the right to share in a recovery is concerned. Any recovery accruing to the Brants would be upon a personal liability they had discharged, the debt being that of the individuals, and not of the trust. The stipulation entitling the mortgagor to share in any recovery was personal and did not pass to the trustee by virtue of the quitclaim deed to the trustee. The purpose of that deed was to restore to the trustee the title to the Brant Rancho, subject to the lien of the mortgage. The right to share in the recovery never became property of the trust.

In 1938 the Mexican Government expropriated most of the productive lands of the Colorado River Land Co., S.A. This terminated any possibility of profitable operation of those lands and the Chandler-Sherman Corporation, successor in interest of the mortgagees, filed suit and obtained a judgment against the Mexican corporation in the California courts. David O. Brant negotiated with the judgment creditor, which agreed to accept conveyance of 750 acres of the Brant Rancho in satisfaction of the Brants' liability under their guaranty. David's brothers and sisters agreed to this and the six directed the trustee to convey the 750 acres to the Chandler-Sherman Corporation, without consideration, as that would be consummated outside of the trust. The trustee conveyed as directed. By virtue of this transfer in settlement of their obligation, the Brants became subrogated to a one-fifth interest in the judgment held by the Chandler-Sherman Corporation against the Colorado River Land Co., S.A. This was their private property and not property of the trust.

In September 1938 one of the six died and the remaining beneficiaries thereafter elected to terminate the trust in a liquidation in accordance with section 112(b)(7) of the Revenue Act of 1938. The distribution was made in December 1938.

Since the guaranties were private obligations of the beneficiaries and not of the trust, the right contracted for in the mortgage to share in a recovery was likewise a private right and not property of the trust, and the interest in the judgment to which the Brants were subrogated upon the settlement of the private obligation was also property of the individual beneficiaries and not of the trust. It follows that the interest in the judgment was not among the assets of the trust distributed to the beneficiaries upon its dissolution. Consequently, sections 112(b)(7) and 113(a)(18) of the Revenue Act of 1938, relating to certain distributions in liquidation by a corporation and which respondent deems controlling, have no application.

The basis to the petitioners of the interest in the judgment to which they had become subrogated is to be measured by the fair market value of the property they caused to be transferred to pay their obligation. The transfer of part of the Brant Rancho was equivalent to a distribution by a corporation (the trust) to its stockholders (the beneficiaries) of specific assets, and the transfer of these assets by the stockholders in payment of their private debt. The fact that the trustee, at the direction of the beneficiaries, made a direct transfer is not determinative. See Security First National Bank of Los Angeles, Executor, 28 B.T.A. 289, pp. 310-311. The Brants acquired from the trust, and to discharge their obligation under the guaranty parted with, property of a value in excess of $167,648.92. As to the value, the Chandler-Sherman Corporation accepted the transfer of 750 acres in satisfaction of its claim for approximately $780,000, and a witness, expert in real estate valuations, placed a value of $510,463.95 on the part transferred. For the purpose of this case it is not necessary to find the value if it was in excess of the amount recovered by the Brants in 1943, as clearly it was. In 1943, when they recovered part of the amount owed them by the land company, they received a return of capital and not ordinary income.

Respondent argues that the petitioners' contention is at variance with the manner in which the transaction was reported in various returns of the trustee and the estates of the deceased beneficiaries. The manner in which other taxpayers may have reported the transaction is not determinative of the issue here. Respondent also argues that the petitioners' contention is not consistent with their returns for 1938, as they did not then treat the receipt of part of the Brant Rancho as separate from the distribution of the remaining trust assets. Under the facts before us, the manner in which the petitioners treated the transaction in their 1938 returns is not conclusive upon them. See Richard K. Mellon, 12 T.C. 90 (on appeal CA-3); Texas Co. (Caribbean) Ltd., 12 T.C. 925.

Respondent contends further that the amount received by each petitioner constitutes interest and is therefore taxable income, pointing out that a large part of the judgment was for interest and that interest also accrued upon the judgment, so that the part of the claim which was for interest exceeded the amount recovered in 1943. Respondent states that under California Civil Code, section 1479, prescribing rules for the application of payments on debts, where no intention as to application is manifested by the debtor and the creditor makes no application within a reasonable time, payments must be applied to the extinguishment of interest before any is applied upon principal. As respondent points out, the reason for the statutory rule is that, in the absence of a designation by the debtor, the creditor is entitled to preserve as a debt, until all past due interest is paid, that portion of the debt which will continue to draw interest.

Although the amount paid to the banks was in part interest and the judgment obtained by the Chandler-Sherman Corporation was for interest as well as principal, the payment to that corporation by the Brants of their liability as coguarantors was, as between these parties, a payment solely of principal. Notwithstanding that some part of the award made in 1943 to the American stockholders was designated as interest, the proceeds which ultimately were received by the Brants as judgment creditors were received in restitution of that payment of principal, and not as interest.

In Commissioner v. Speyer, 77 Fed.(2d) 824, and Commissioner v. Ullmann, 77 Fed.(2d) 827 (certiorari denied, 296 U.S. 631, in both cases) the Circuit Court of Appeals for the Second Circuit, in affirming the Board of Tax Appeals, held that no taxable income was received by certain taxpayers as the result of awards on account of war claims against the German Government until the taxpayers had received a return of their capital losses. In view of such decisions, the General Counsel for the Department of the Treasury took the position that no taxable income is derived from awards by the Mixed Claims Commission, United States and Germany, under the Settlement of War Claims Act of 1926 until there has been a recovery by the taxpayers of their capital bases. G.C.M. 16166, C.B. XV-1 (1936), p. 175. In Drier v. Helvering, 72 Fed.(2d) 76, the Court of Appeals for the District of Columbia held to the same effect, pointing out that, although a part of the award was designated as interest, the total received by the taxpayer did not exceed the cost basis to the taxpayer of the property seized by the German Government.

The same principle applies here. Whether petitioners will ever recover their capital basis is not now ascertainable. The Mexican Government agreed to make certain payments. Whether all will be paid as agreed or the amount ultimately paid to stockholders of the land company will be sufficient to pay the judgment in full can not now be known. Under these circumstances the petitioners have not received interest. The provisions of the California statute referred to by the respondent, under the circumstances here, are not applicable.

Decisions will be entered for the petitioners.